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The Fall and Rise of J.C. Penney (JCP)

Retail store J.C. Penney (JCP) is surging again, with the stock up almost 5% heading into afternoon trading after apparel company PVH (PVH) released a solid earnings report that crushed expectations.

PVH’s stock was up almost 10% after the company posted profits of $1.51 a share for Q2 of 2014, a figure that was well above consensus estimates of $1.42 a share and an 8.6% gain on the year-ago period.

The gains rippled over to J.C. Penney as the store sells many of PVH’s brands, which include Calvin Klein, Tommy Hilfiger, Van Heusen, IZOD, Bass, ARROW, and Eagle. And the solid earnings from PVH only bolster those that J.C. Penney itself put out in mid-August, when the company reported a loss of $0.56 a share despite analyst expectations of a $0.96 loss. The company also reported a 6% increase in comparable store sales and a 5% increase in total sales.

So what gives? Is it possible that J.C. Penney, despite the disastrous fall from grace that had it removed from the S&P 500 and losing money faster than a near-sighted bank teller, is now poised to be one of the companies that emerges from the knife fight that retail’s turning into, stepping into the light over the bleeding corpse of Sears (SHLD) ?

Hey, That’s Sure a Long, Dark Tunnel You’re Emerging From

Around this time last year, things looked pretty bleak for the discount retailer. The company’s stock had bottomed out in February and continued to limp along, CEO Ron Johnson had been fired in April after an utterly disastrous albeit brief tenure, and the company was headed to a year where revenues were off by more than $4 billion (a nearly 25% decline) and the company would post a nearly $1 billion loss. If there were a single poster-store for the decline of retail, J.C. Penney appeared to be it.

However, the week after Labor Day 2014 has things looking up. Way up. Certainly, the store still has some major hurdles to clear, and clear in some major headwinds, but the harbingers of doom that appeared to be present in 2013 have, for the most part, started shrinking.

On the whole, this shouldn’t be too shocking. The company’s decline had a lot less to do with long-term retail trends and lot more to do with Ron Johnson’s efforts to aggressively fight against them. And now, with former CEO Myron “Mike” Ullman back at the tiller, J.C. Penney may well be sailing back towards more profitable waters.

This Whole Episode May Read as an Indictment of the “Screw Our Customers” Approach to Retail

The Johnson hiring was supposed to usher in a new era. J.C. Penney, like most retailers, was well aware of the slow erosion of its sales over time. In order to stay alive, box stores were going to need to do something new to make themselves relevant, give people a reason to head into the physical store rather than just ordering online.

Johnson seemed like the ideal candidate for that. His primary selling point was his massive success while heading up the retail segment for Apple (AAPL) . The sleek, stylized feel of Apple stores seemed to epitomize exactly what retail would need to be in the post-Amazon (AMZN) era, one where stores offered a lot more than just a place to buy stuff.

Unfortunately, Johnson…well, he just did everything wrong. Whether or not his vision for J.C. Penney might have worked is hard to say. What can be said, unequivocally, is that he really, catastrophically fumbled the rollout.

Johnson effectively tried to make J.C. Penney into the Apple Store overnight, throwing out a variety of things that had previously been a hallmark of J.C. Penney like sales and…well, mostly sales. People really like sales. He compared the coupons that J.C. Penney had long relied on to drugs consumers were addicted to and insisted that their customer base needed to be educated about the new full-but-fair pricing. Johnson also remade stores to feature hipper designer brands sold in specialty shops that replaced racks of clothes.

On the whole, he essentially didn’t seem to place any value on the company’s existing customers, trying to implement radical changes over a short period of time without giving serious thought to rationing his resources or how the company’s cash flows factored into things. He also did this while cleaning house at the company’s executive level and continuing to live in California while taking a private jet to Plano, TX a few days a week for work.

And, guess what? It didn’t work. REALLY didn’t work. In essence, there was plenty of reason to believe that J.C. Penney simply filled a different niche and was never going to be able to transition into the sort of upscale, stylish store Johnson envisioned. The company’s customers, frustratingly enough for Johnson, seemed to LIKE that they could get familiar brands at discount prices. They also didn’t seem all that interested in making J.C. Penney their new “hang out” like some did with Apple Stores. And as those customers left in droves, the hipper, younger customers that Johnson apparently envisioned going to JC Penney never materialized.

On the whole, the My Fair Lady-style transition that Johnson seemed to have in mind was not forthcoming. And even if one was to believe that such a transition was possible, despite all of the evidence to the contrary, the execution was so brutally misguided that the potential wisdom of the long-term plan ended up being completely moot.

By April of 2013, Johnson was out and quickly being written into text books as examples of just how badly a CEO can botch their job and Ullman, who had been J.C. Penney’s CEO for the seven years prior to Johnson’s hiring, was back in.

More of the Same. No, Not That Same. The Old Same.

So that should be the end of this story, right? I mean, J.C. Penney needed to make changes, they hired a rainmaker who was supposed to take them to new places, and that guy made things way, way worse than they were before. I mean, it’s like a fishing boat hired a new captain in hopes that he would guide them to new, more-fertile fishing grounds and then that captain ran the ship aground and set it on fire before hopping onto his private jet and flying back to California.

However, oddly enough, J.C. Penney has been coming back. Ullman, with his experience in handling J.C. Penney’s business, appears to have figured out that respecting and catering to the people who actually liked their store may be a business model with something to it.

For starters, Ullman announced plans to close 33 underperforming stores in January, helping to streamline the company’s business and reduce losses. They also paired with private companies like PVH to improve its offerings, and those private labels are performing well at J.C. Penney stores.

Ullman also made a big effort to bring back the store’s traditional base that it had lost during Johnson’s tenure by bringing back discounting, coupons, and other promotions as well as a new ad campaign geared towards its traditional demographic that included six ads aired during the Academy Awards featuring the new tagline “When it fits, you feel it.” Homey, right? That’s good copy, right there.

However, interestingly enough, another major shift came regarding the store’s approach to e-commerce. Ironically enough, it was Johnson, the person who was supposed to usher J.C. Penney into the future, had crippled the company’s online sales when he shifted to a separate channel approach for online business that would feature wholly different products online as would be sold in the stores.

The result of this move was that customers could neither shop online for items at the store nor head to the company’s website when the physical store didn’t have what they wanted. And it didn’t work, with online sales shrinking by a third in 2012.

"Ninety percent of our sales are in stores today. That's where the customer chooses to shop. Tomorrow, it will be much more of an omnichannel approach, but that's tomorrow. You've got to focus on where they are shopping today, and that is the physical store," said Johnson in January of 2013.

And you know what? He was kind of right. Because he got fired about three months later and Ullman promptly returned things to the “omnichannel” approach that allowed the company’s online and physical presence to complement each other upon his return. Online sales grew 6% in 2013 and are currently spiking in 2014.

JC Phoenix

So, it hasn’t just been J.C. Penney customers noticing the differences, both the stock markets and analysts have as well.

The company’s stock recently got a boost from JP Morgan analyst Matthew Boss when he said he thought the company was in a good place to continue its comeback, noting that further store closings could greatly benefit profitability.

And on Thursday, Thomas Forester, CIO of Forester Capital Management, noted in an interview with Forbes that J.C. Penney could present a very appealing investment based on its current share price, noting that its P/B ratio of 1.2 represented a significant discount over other major retailers.

So, for anyone who was holding a lot of J.C. Penney stock after the dust cleared last year, Ullman may seem capable of walking on water. The company has more than doubled in value since hitting its low point on February 24, gaining just shy of 114% in that time frame.

So can this continue? Certainly, one should be careful not to give Ullman and Penney too much credit. Things were so bad under Johnson it’s not as though a major rebound is a revelation. The store had shed a third of its revenues, so recovering some portion of that isn’t exactly turning water to wine. Sure, the current share price just north of $11 a share looks darn good when compared to its 52-week low of $4.90. However, shares were as high as $42 early in 2012 (when everyone was still more familiar with “Ron Johnson: Visionary” rather than “Ron Johnson: CEO”) and $85 in early 2007 (before, well, you know…the unpleasantness).

But fighting back to recover market share in an environment that’s hardly friendly to retailers is still something that warrants attention. Especially when that includes such a robust bounce back for the company’s online sales. All told, Ullman may have hit on his own vision for how J.C. Penney can navigate the dangerous waters that lie ahead for retail, one that’s really just taking J.C. Penney’s old blueprint and applying it to a new marketplace.

If J.C. Penney can continue to appeal to its core audience with discounts and deals while integrating a new online platform that’s complemented by its physical stores, it may ultimately be able to carve out the sort of clear niche in the next stage for retailers that hiring Ron Johnson was supposed to create.

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